LANDSCAPE OF HOUSING INVESTMENTS IN EASTERN AFRICA By Duncan Kayiira
OUTLINE OF THE PRESENTATION • Background and Context. • The Investment Landscape in Eastern Africa. – Profile of Investors in Eastern Africa. – Investment Activity in Housing in Eastern Africa. – Impact of Investments on the Housing Industry in Eastern Africa. – Investment Opportunities for the Housing Industry in Eastern Africa.
BACKGROUND AND CONTEXT • Growing financial sector experience and increasingly sophisticated financial instruments are driving Investor interest in African real estate. • However, a key barrier to this growth remains the chronic lack of rigorous data on the breadth and character of financial infrastructure investment. • Without this data, targeted interventions to stimulate housing sector investment result in unresponsive housing finance packages. • The need for more rigorous & nuanced data collection/analysis & interpretation is key to facilitating evidence-based decision making in the sector.
BACKGROUND AND CONTEXT Information Asymmetry in EAC Housing Markets • Targeted mortgage market by Bank/Developer There is a growing (8% of formal labor force; and accounts for 2% bias in analysis of the of urban housing backlog) housing finance markets in the EAC Potential Mortgage Market but products are unaffordable (18% of • All analysis seems formal labor force; and accounts for about 25% of urban housing backlog) asymmetrically inclined on ONLY the middle and high income earners - a symptom of a lack of enough AFFORDABLE long- term funds.
BACKGROUND AND CONTEXT • Information gaps that require urgent address include; – Market overview data: This includes data on who is investing in which parts of the housing delivery and financing value chains. – Market performance data : This needs to be segmented by target market, housing type or investment intervention, and geography. – Competitive market horizon : the size, financial capacity, geographic reach and market share of participants in the housing sector and in the housing finance. • This report address the above information gaps by profiling investors & investment instruments, with the greatest impact on the housing. • Opportunities are presented that would stimulate greater investment in affordable housing and connecting investors with potential investments.
THE INVESTMENT LANDSCAPE IN EASTERN AFRICA
PROFILE OF INVESTORS: Local institutional investors
COMMERCIAL BANKS • The commercial banking industry is improving, evidenced by the efficiency in mobilizing deposits – and high asset conversion rates from customer deposits. Asset Conversion Rate - EAC Partner States 84% 82% 80% 78% 76% 74% 72% 70% Burundi Kenya Rwanda Tanzania Uganda Source: Data from Central Banks (2017)
COMMERCIAL BANKS • Presently, commercial bank deposits in EAC are estimated at about US$ 8 billion. • A 15% ratio, which by international standards, may safely be considered for long term lending, translates to about US$ 1.2 billion. • However, the region has a funding need of US$ 42.2 billion (estimated from the average mortgage and the average housing deficit). • The core deposits (15%), therefore ONLY COVER 3% of the total funding gap. • This funding gap has been addressed with a mix of local and foreign funds (as we discuss in the next slides).
CAPITAL MARKETS • In Eastern Africa, the capital markets, are still underdeveloped, though efforts are underway to enhance their efficiency (to attract sizeable investments). • With the exception of Kenya, the other Partner States have struggled to raise sufficient long-term funds for housing, as illustrated in Table below; Capital Market InvestmentTools Portfolio for Housing Investments NSE (Nairobi) Bonds, Shares, Rights Issue and REITS Over US$ 500 million USE (Uganda) Bonds US$ 20 million DSE (Tanzania) REITS US$ 30 million RSE (Rwanda) Bonds US$ 13 million
CAPITAL MARKETS • In Kenya, funds raised from the capital markets have financed over 10,000 housing development projects, at an average rate of 16.5%. – A rate of 16.5% is however high, because the proceeds of the bonds, carried a fixed high rate of 13% to attract a sizeable number of retail and institutional investors • Over US$ 100 million has been raised through REITS, for purposes of making a return through capital gains and rental income on property investments – A high return (20%) on investment is key in making shares in REITs attractive to investors. There is therefore a strong impetus for the REIT to invest in luxury rental apartments • Overall, there are literally few or no opportunities for the funds raised from the capital markets to invest in affordable housing, largely because it fetches low returns (5%)
PENSION FUNDS • Through medium term loans, pension funds have provided finance (over US$ 100 million) to commercial banks, seeking to extend mortgage lending. • However, the cost at which pension funds are loaned to banks is high (above 12%), because of Government’s internal/ domestic borrowing. – In order for Governments to raise the necessary funding for their budgets, they must issue treasury bills and bonds at relatively attractive rates for investors (10 - 12%). – Making these rates attractive necessarily offers a new investment opportunity for both bank and non-bank institutional investors. • To continue lending to the private sector, commercial banks increase the mortgage rate, since individuals are more risky compared to the government.
PENSION FUNDS • Recent provisions in pension regulations for both Kenya (2009) and Uganda (2017) have paved way for commencement of pension-backed mortgages. – In Kenya pension scheme savers can use up to 60% (50% for Uganda) of their savings as collateral guaranteeing a housing loan. • However, some of the regulatory provisions, have limited the use of pension funds to support housing developments. – In both Kenya and Uganda pension funds can no-longer make direct loans to commercial banks; implying no access to long term pension assets to finance housing developments (See Next Slide). • In addition, Pension schemes (Kenya and Tanzania) have a regulatory limit of 30% for investments into real estate assets. – The impact of this limitation is that fewer housing establishments are realized from pension scheme assets.
PENSION FUNDS Summary of NSSF’s Long and Short-term Investments Long-term Investments by NSSF to commercial Banks (2009) Commercial Year and purpose Funds Terms for Funds Bank (Value) Housing Finance Funding Agreement with NSSF to finance UGX 25 Tenor of 15 years Grace period – not indicated Bank (HFB) HFB’s mortgage business (2011) Billion 11.5% interest rate per annum payable on a quarterly basis Funding Agreement with NSSF to finance UGX 20 Tenor of 10 years Grace period of 2 years HFB’s mortgage business (2009) Billion 13.1% interest rate per annum payable on a quarterly basis DCFU Bank Funding Agreement with NSSF to finance UGX 15 Loan tenure of 10 years, with a 12 months grace period, accruing only interest DFCU’s mortgage business (2009) billion Principal on the loan facility to be repaid in 18 semi-annual instalments UGX 7.5 billion at a fixed interest rate of 13.5 percent per annum.50% at a variable rate, based on a recently auctioned 182 days Treasury bill yield, with a spread of 1.75 percent per annum Short-term Investments by NSSF to commercial Banks (2014 onwards) Commercial Bank Year and purpose Funds (Value) Terms for Funds DCFU Bank Funding Agreement with NSSF to UGX 28 billion 10 billion at 13% for 3 months 4 billion at 13% for 1 month finance DFCU’s short -term investments 178 million at 12% for 1 month Short-term (2014) 822 million at 12% for 1 month Investments 6 billion at 13.5% for 3 months 7 billion at 13.5% for 3 months NSSF and Bank’s Annual Reports and KII
PROFILE OF INVESTORS: Foreign institutional investors
OVERVIEW – FOREIGN INVESTORS • 20 foreign investors (in housing), thanks to a generally political and economically secure common market looking for new affordable investments • IFC, EIB, AfDB and AFD have established regional offices in Nairobi for ease of co- ordination of their activities across the region • The majority (99%) of foreign institutional investors are DFIs. • DFIs are fully owned or partially owned by the government and private shareholders (e.g. DUTCH FMO) • The structure of ownership of DFIs influences how they are regulated and funded; – E.g. FMO is treated like a bank and must meet requisite capital requirements
OVERVIEW – FOREIGN INVESTORS • DFIs are funded directly by governments and/or access loans from various markets at competitive rates (as low as 4%, payable between 15 and 25 years). – EIB uses a mix of shareholder capital and bonds to raise capital for on-lending to financial institutions, Private Equity Funds and projects in various currencies. – EIB does not particularly provide funding for residential housing units but finances projects aimed at offering furnished apartments (flats – for boosting the tourism sector). • DFIs also mobilize (or leverage) additional capital for the projects they invest in from private sector sources. – In 2010, AFDB issued a corporate bond, listed it on Uganda Securities Exchange, to raise funds for HFBU to extend its mortgage business/lending
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